01/11/09

From Comment

Rating and Ranking Global Financial Centres

Mark Yeandle crunches the numbers on the latest set of ratings and rankings from GCFI 6, as compiled by the Z/Yen Group Limited.

The Nature of Protectors’ Powe…

In 2005, the Z/Yen group was asked by the City of London to evaluate London’s position as a global financial centre by comparing it against three other financial centres – New York, Frankfurt and Paris. Having conducted this initial research, Z/Yen proposed the creation of a more dynamic means of comparison between a much broader sample of financial centres. In 2007, the Global Financial Centre Index (GFCI) was born.

Since that time, an increase in the number of respondents, coupled with the accumulation of data drawn from successive editions, has enabled us to highlight the changing priorities and concerns of finance professionals.

GFCI 6, the most recent edition of the Index, was published in September 2009, and provides ratings and rankings for 75 financial centres. This represents an increase on the amount of centres covered in GFCI 5 and, indeed, all of its predecessors. Ratings and rankings are calculated by a ‘factor assessment model’ which combines 64 instrumental factors (external indices) with over 36,000 assessments of financial centres from responses to an online questionnaire.

It will come as no surprise to readers of IFC Review that GCFI 5, which covered the most turbulent weeks and months of the recent economic crisis, generally reflected negative perceptions inspired by widespread recession and uncertainty about the future of financial services. GCFI 6, however, demonstrates that pre-financial crisis assessment levels have returned, with an increased optimism and indications that the end of the crisis is probably in sight.

The latest index shows that of the 75 centres rated, 59 have received higher scores than in GFCI 5, and only three have decreased. Thirteen new centres appear in the ratings for the first time.

The GFCI questionnaire asks respondents which financial centres they believe are suffering most as a result of the current financial crisis. New York and London both received three times more mentions than any other centre. The main concerns voiced about the leading centres’ competitiveness centred on the fear of a regulatory backlash that may limit the freedom of financial institutions, and also a loss of skills and experience from the industry.

It is clear that the offshore centres have come under increased scrutiny during the financial crisis. Because many offshore centres are still regarded by the wider world as ‘tax havens’, there has been significant pressure applied to them in recent times, both by national regulators and by international bodies such as the OECD, to bring about a reduction in secrecy as required by internationally agreed tax standards.

Although the rankings of the offshore locations have generally declined, GFCI 6 shows a strong correlation between GFCI ratings and the status of offshore centres in the OECD tax standard implementation list. The OECD has regularly updated its ‘White List’ (jurisdictions that have substantially implemented the tax standard), its ‘Grey List’ (jurisdictions that are committed to but have not yet substantially implemented the tax standard) and its ‘Black List’. The centres on the ‘White List’ are rated higher by respondents that those on the ‘Grey List’.

Jersey regains its place just ahead of Guernsey (by just two points on a scale of 1,000) after having been ranked behind it in GFCI 5. The British Virgin Islands are the only offshore centre to rise in the rankings, up one place to 33rd.

All of the top offshore centres achieve higher than average assessments from other offshore centres and from London, but they receive lower assessments from Europe and Asia. Very few respondents from North America assessed the offshore centres (even those in the Carribean). This is perhaps surprising given the pressure being applied to offshore centres by the US government, and the wide coverage in the financial press that these centres have been generating.

Also notable in GCFI 6 has been the rise of Asia. All Asian centres have shown a dramatic rise in ratings since GFCI 5. As well as being well supported by respondents from Asia itself, their general popularity among international financial centres may indicate that the Asian centres have been less badly affected by the recent crisis than many of the leading European and North American Centres.

Hong Kong continues to thrive and has risen by 45 points since GFCI 5. It has also regained 3rd place in GFCI from Singapore. It is in 3rd place in all areas of competitiveness and 3rd in the banking, asset management and insurance industry sector sub-indices.

Singapore has been climbing steadily in the GFCI ratings and has risen by 32 points in GFCI 6. It is 4th place in all areas of competitiveness and 3rd in the professional services and Government & Regulatory industry sector sub-indices.

Shanghai has moved into the top ten with a gain of 117 in the ratings and Beijing has jumped to 22nd place with a rise of 135 points. Tokyo has risen back into the top ten with an increase of 63 points, having fallen to fifteenth place in GFCI 5. We were somewhat surprised that Tokyo was ranked outside the top ten in GFCI 5 – perhaps an over-reaction to some of the trouble that Tokyo has suffered recently. A top ten position is probably a more accurate assessment.

Shenzhen is a new entry into the GFCI and has secured 5th rank due to very strong support from the other Asian centres.

However, London remains in top place overall in the Index, and has slightly extended its lead over New York (to 16 points from 13 points in GFCI 5). The gap between New York in second place and Hong Kong in third has been cut from 81 points to 45.

Hong Kong and fourth-placed Singapore have demonstrated the kind of stable, long-term competiveness that has always characterised London and New York. These financial powerhouses have remained in first and second places respectively in the first six editions of the GFCI, but Hong Kong and Singapore can rightly be said to have joined them as genuine global leaders.

GFCI 6 demonstrates a pattern that most of the leading centres are also the most ‘connected’ centres. London is rated by (and thus familiar to) over 80% of non-home respondents, New York is rated by two thirds of non-home respondents and Hong Kong is rated by 57% of non-home respondents.

The GFCI has previously highlighted the need for competitive financial centres to be connected and co-operative. Respondents to the GFCI questionnaire believe that the need for connectivity and co-operation is greater than ever if the industry is to deal with, and recover from, the current crisis.

The GFCI model continues to grow and reflects changes in financial centres globally. Additional questionnaire responses and updated instrumental factors will continue to develop the Index over time.

GFCI 7 will be published in March 2010. Please make your views known by participating in the GFCI by rating the financial centres you are familiar with at: www.cityoflondon.gov.uk/GFCI.